US Election: Status Quo vs. Who Knows?

Summary:
What politicians say and what presidents do often have little to do with one another. U.S. President Franklin D. Roosevelt, for example, implemented the New Deal a year after the Democratic Party pledged to slash government spending. Still, with the U.S. presidential election fast approaching, the economists on Credit Suisse’s Global Markets team analyzed the campaign promises made to date in the hope of giving investors some sense of what the future might hold.
They determined that if Hillary Clinton becomes the first female president, neither the direction of policy nor political dynamics in Washington would change much. A win for Donald Trump, on the other hand, would result in high levels of policy uncertainty, and the potential for “significant long-term costs and externalities” as a result of his promises to lessen regulations in industries such as energy and finance.
The Global Markets team puts the probability of a Trump win at less than 10 percent. As is often the case, the election seems destined to hinge on swing states such as Florida and Ohio, where local polls show Clinton in the lead. Still, because the potential disturbance to the status quo from a Trump victory is so high, the possibility is well worth considering.

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What politicians say and what presidents do often have little to do with one another. U.S. President Franklin D. Roosevelt, for example, implemented the New Deal a year after the Democratic Party pledged to slash government spending. Still, with the U.S. presidential election fast approaching, the economists on Credit Suisse’s Global Markets team analyzed the campaign promises made to date in the hope of giving investors some sense of what the future might hold.

They determined that if Hillary Clinton becomes the first female president, neither the direction of policy nor political dynamics in Washington would change much. A win for Donald Trump, on the other hand, would result in high levels of policy uncertainty, and the potential for “significant long-term costs and externalities” as a result of his promises to lessen regulations in industries such as energy and finance.

The Global Markets team puts the probability of a Trump win at less than 10 percent. As is often the case, the election seems destined to hinge on swing states such as Florida and Ohio, where local polls show Clinton in the lead. Still, because the potential disturbance to the status quo from a Trump victory is so high, the possibility is well worth considering.

While Trump has made what Credit Suisse calls “vague and inconsistent statements” about his policy priorities, it does seem likely that a Trump presidency would be inflationary. The Republican candidate has promised to significantly lower individual and corporate tax rates, reduce the number of tax brackets from seven to three, and eliminate federal estate taxes, gift taxes, and the alternative minimum tax. Such tax cuts would likely boost short-term economic growth, which would be inflationary, but they would also reduce revenues to the U.S. Treasury by as much as $6.5 trillion over the next 10 years. National debt projections would rise significantly as a result, and concern about the cost of future interest payments might make the Federal Reserve reluctant to raise interest rates. Low interest rates and a positive shock to growth provide a textbook environment for rising inflation.

Trump has also said he would seek to replace Federal Reserve Chair Janet Yellen and has criticized the central bank for keeping rates low for political reasons. Criticizing the central bank and replacing its leader might well raise questions about the Federal Reserve’s independence, and that independence is a key factor in keeping inflation in check.

In addition to these short-term effects, Trump’s anti-immigration and anti-trade policies would likely be inflationary in the long term. Cracking down on illegal immigration—and potentially tightening the rules for legal immigration—would likely increase labor costs for U.S. companies. Trump has also been a strong critic of trade deals such as the Trans-Pacific Partnership (TPP), which promised to reduce tariffs, thereby reducing prices of foreign imports for American consumers. The GOP candidate has also promised to penalize companies that invest overseas and outsource jobs, which would raise the cost of doing business for many American firms. Eventually, those increases would likely result in higher prices for U.S. consumers.

In the event of a Hillary Clinton victory, voters can expect the difficulties that President Obama faced in passing legislation through a Republican Congress to continue. As such, it’s highly likely that Clinton will follow in Obama’s footsteps and rely heavily on executive orders to implement her policy agenda. Obama is on track to issue more high-level executive actions than any president since Harry Truman, who left office in 1953.

While Clinton’s stump speeches call for significant tax increases on top earners, it’s highly unlikely that the GOP legislature will cooperate. Two domestic agenda items with a better chance of passing GOP muster, assuming Clinton is willing to compromise: immigration reform and a $275 billion infrastructure package. But Credit Suisse’s economists caution that such a package would likely have very little impact on economic growth.

The biggest changes voters can expect from a Clinton presidency won’t come from domestic policy. Clinton will likely continue President Obama’s “pivot to Asia,” but Credit Suisse believes she will prove to be more hawkish on foreign policy and would be particularly quick to counter any Russian attempts to destabilize Europe. Finally, though Clinton has said she opposes the Trans-Pacific Partnership and would continue to do so as president, Credit Suisse believes she has left herself room to approve a revised version of the treaty. It’s impossible to tell for sure, but for now, voters appear to be faced with a choice between more of the same and a radical departure from the status quo. As always, only time will tell which they will get.

Ashley is an editor and writer at The Financialist. Previously, she worked as a national correspondent at The Daily, the first publication created exclusively for tablet devices, covering everything from municipal bonds to prisons. Before that, she spent five years reporting for daily newspapers in New Jersey.